Risk Connection A 12 th District Training and Risk Information Program hosted by the Risk Coordination Unit Division of Financial Institution Supervision and Credit Market Trends & Discussion with an Appraiser and Review Appraiser March 31, 2017 Ron Pavlick (FRBSF), James Watson (CoStar Group), Steven Basham (CoStar Group), David Rosenthal (Curtis-Rosenthal Inc.), and Allen Greer (Greer Advisors, LLC)
Administrative Items All lines are currently on mute. Please hold questions until the designated question and answer period. To ask a question, press *6 on your telephone keypad to unmute your conference line. Press *6 again to put your line back on mute. If asking a question, remember to also ensure that your phone is not on mute. This presentation and accompanying materials are for internal staff only. 2
About the Program Risk Connection is a call-in program for delivering highly-targeted training and information on topics such as new job aids, new workprograms, new rules and regulations, and other risk-specific topics. The program is hosted and administered by the Risk Coordination Unit. These calls are recorded for future reference (see Risk Coordination Training Resources and image at right). Questions about the program can be directed to Wally Young, Director of the Risk Coordination Unit. 3
Today s Topic Market Trends & Discussion with an Appraiser & Review Appraiser 4
Agenda 1. Market Trend Presentation by CoStar Group 2. Discussion with an Appraiser from Curtis-Rosenthal, Inc. and a Review Appraiser from Greer Advisors, LLC 5
James Watson Managing Director Stephen Basham Sr. Market Analyst 6
Agenda: USPAP Compliance & CoStar CoStar Intro/Overview 17Q1 Multifamily Overview 7
USPAP COMPLIANCE & COSTAR Top 3 Vital Signs: Absorption, Vacancy, & Rents Most Appraisers Don t Comply With USPAP Standards Rule 1-1: Use Due Diligence & Due Care Standards Rule1-3: Avoid Unsupported Assumption Or Premise About Market Area Trends Standards Rule 1-4: Must Collect, Verify, And Analyze all Information Necessary For Credible Assignment Results USPAP Requires As-Is values In Addition To Hypothetical Values For Construction Projects 8
USPAP COMPLIANCE & COSTAR Lenders Are Required To Verify Appraiser Compliance To USPAP CoStar Mirrors The Market Supply And Demand Market Area Trends Sales Comps Lease Comps Track Under Construction & Proposed Projects 9
40+ Banks and Credit Unions Use CoStar in L.A.. Manufacturers Bank California Credit Union Farmers & Merchants Bank Community Bank Union Bank Boston Private Bank & Trust America s Christian Credit Union American Business Bank EverTrust Bank Royal Business Bank Logix Credit Union Banc of California Pacific Western Bank First Community Bank East West Bank 1st Century Bank Luther Burbank Savings Premier America Credit Union Cathay Bank Grandpoint Bank Far East Bank Community West Bank Wing Lung Bank FDIC, OCC, Federal Reserve American United Bank 10
CSGP NASDAQ Traded $ 6.5 Billion Market Cap 30 Years 220 Markets of 2016 3200 $100 Employees Million Washington DC Head Quarters 11 Annual Research Investment
CoStar Research 200 Field Research Vehicles 2,000 Full-Time Researchers 30 Third Party Data Feeds (MPAC, TERANET, etc.) Research is what we do 12
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CoStar Research THIRD-PARTY DATA FIELD RESEARCH Census A Proactive Approach to Gathering Data PHONE RESEARCH DAILY UPDATES 14
How a Transaction becomes a Verified Sales Comp Closed Listings Self Reported Sold CMBS Press Releases SEC Filing Court House Records / Visits Proactively research multiple sources of transactions Examine & consolidate documents & Deeds Conduct Site Visits 2000 Researchers 15 Report Verified Sales Interview parties and reconcile / confirm details Append building details, geo codes, and images
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Asking Rents 17
Effective Lease Comps 18
19 Daily Reports 3. 1. 2. Analysts receive alerts about significant changes and update the written narrative accordingly All current and historical analytic data, tables and graphs are updated to reflect latest changes New forecasts are generated every night so they are based on the new reality
Daily Reports December 31st February 7th 20 February 9th February 11th
December 31st 17Q1 Regional Multifamily Overview Presented By Steve Basham 21
Decline In Homeownership Has Driven Rental Demand 70% Homeownership Rate Renter Occupied Households (Millions) 46 69% 44 68% 67% 66% 65% H.O. Rate in 2004 Peak : 69.2% 2016 Q4 H.O. Rate : 63.7% Increase in Renter HH's : 10.1M Increase due to HH Formation: 3.6M Increase due to Change in H.O. Rate: 6.5M 42 40 38 64% 36 63% 62% 34 61% 32 60% 94 96 98 00 02 04 06 08 10 12 14 16 30 Renter Households U.S. HO Rate 22 Sources: Moody's Analytics; U.S. Census Bureau (CPS/HVS); CoStar Portfolio Strategy As of 16Q4
Homeownership Declined Across Most Age Cohorts 115 Homeownership Rate Index* (100=1990) 110 105 100 95 90 85 90 92 94 96 98 00 02 04 06 08 10 12 14 16 < 35 35-44 45-54 55-64 65+ 23 Sources: Moody's Analytics; U.S. Census Bureau (CPS/HVS); CoStar Portfolio Strategy *Three-Quarter Moving Average As of 16Q4
LA Near-Term Outlook: Household Formation Vs Apt Growth 20 HH Vs Apt Growth (000s) 15 10 5 0-5 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Household Growth (Renters) Apartments Growth 24 Source: Moody's Analytics; CoStar Market Analytics As of 16Q4
Los Angeles Cumulative Housing Unit Supply Cumulative Net Supply of Housing Units (000s) 40 28 30 2 6 7 14 21 12 20 10 0 (2) (10) (14) (19) (22) (26) (31) (10) (20) (30) (41) (40) 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 (50) 25 Source: Moody's Analytics; CoStar Market Analytics As of 16Q4
Peak Construction Expected In 2017 300 Supply (000s Units) 250 200 150 100 50 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Supply Change (Y/Y) Historical Average Supply (1990-16) 26 Source: CoStar Portfolio Strategy As of March 2017
Historical Deliveries By Metro 12,000 Units Delivered 10,000 8,000 6,000 4,000 2,000 0 05 06 07 08 09 10 11 12 13 14 15 16 27 Source: CoStar Market Analytics *Year-to-Date Los Angeles Orange County Portland OR San Diego Seattle As of 16Q4
Units Under Construction 30,000 Units Under Construction 25,000 24,661 20,000 19,049 15,000 10,000 10,420 8,798 7,126 5,000 0 Los Angeles Orange County Portland OR San Diego Seattle 28 Source: CoStar Market Analytics Los Angeles Orange County Portland OR San Diego Seattle As of 16Q4
Average Rent Levels 1 Bedroom Unit $2,000 $1,800 $1,600 $1,400 Rent/Unit $1,878 $1,830 $1,676 $1,506 $1,200 $1,246 $1,000 $800 $600 05 06 07 08 09 10 11 12 13 14 15 16 17* Los Angeles Orange County Portland OR San Diego Seattle 29 Source: CoStar Market Analytics *Year-to-Date As of 17Q1
Annual Rent Growth By Metro 15% Rent Growth Y/Y 10% 5% 0% (5%) (10%) 2016 Rent Growth Los Angeles: 4.21% Orange County: 4.18% Portland: 4.14% San Diego: 3.96% Seattle: 5.69% 05 06 07 08 09 10 11 12 13 14 15 16 30 Source: CoStar Market Analytics *Year-to-Date Los Angeles Orange County Portland OR San Diego Seattle As of 16Q4
Median Price Per Unit By Metro $300 Price Per Unit (000s) $274 $250 $200 $150 $236 $211 $166 $155 $100 $50 $0 05 06 07 08 09 10 11 12 13 14 15 16 17* 31 Source: CoStar Market Analytics *Year-to-Date Los Angeles Orange County Portland OR San Diego Seattle As of 17Q1
Historical Sales Volume By Metro 12,000 Sales Volume (Millions) 10,000 8,000 6,000 4,000 2,000 0 05 06 07 08 09 10 11 12 13 14 15 16 17* 32 Source: CoStar Market Analytics *Year-to-Date Los Angeles Orange County Portland OR San Diego Seattle As of 17Q1
Appraiser and Review Appraiser 33
Review Issues for Commercial Real Estate Appraisals Everett (Allen) Greer, MAI, FRICS, AI-GRS Greer Advisors, LLC March 31, 2017 Federal Reserve Board 34 Greer Advisors, LLC
Goals of Presentation Regulations Qualifications Scope of Work / Written Document Examples of Issues Note: PPT Deck will be posted to www.greeradvisors.com Market information is updated via Newsletter, sign up on web site. 35 Greer Advisors, LLC 35
Regulations Commercial Appraisal Reviewers must be Certified in at least one State. Discuss Opinions on this issue. The Appraisal Subcommittee concluded that for federally related transactions the review appraiser need not register for temporary practice or otherwise be subjected to the regulatory jurisdiction of the State agency in which the appraisal was performed, so long as the review appraiser does not perform the technical review in the State within which the property is located. See Appraisal Subcommittee Policy Statements, Page 13 via link below. http://greeradvisors.com/asc_policy_statements_2008.pdf Some states attempt to require certification in their state. If the value is changed in the review, or the reviewer steps foot in the State, they must be certified. 36 Greer Advisors, LLC 36
Qualifications As noted before, the reviewer must be certified in at least one State. The reviewer must be competent to perform the review. Competency is impacted by: Complexity of the Valuation Assignment Complexity of the Property / Property Type / Location Complexity of the Scope of Review Many other issues next slide 37 Greer Advisors, LLC 37
Scope of Work / Written Document The following are examples of the scope of the review: Is the entire report read, or merely portions? Is the math checked, or not? If a DCF is used, is the DCF checked for accuracy? If the DCF is via Argus, does the reviewer have Argus, and is the reviewer competent with Argus? Is the sales history/listing status of the subject verified? Are comparables verified? Does the reviewer pull new data, i.e. comparable not in the report? Does the reviewer have access to appropriate data sources, e.g. Argus, LoopNet, RealQuest Pro, ESRI? Does the reviewer understand environmental or other issues? Not all review documents are equal. Some reviews are so thin, you can t tell the reviewer read the report, i.e. Trust Me. Some are comprehensive. 38 Greer Advisors, LLC 38
Examples of Recent Issues in past 60 days Two Properties, nearly identical. Two appraisals. Two companies. Different Values. Appraiser versus Assistant Completing the work. Large change in value. Scope was NOT sufficient. Appraisal Quality is NOT an Absolute, Differs Regionally by Bank, by Dept. in Bank. Who is driving the appraiser, appraisal dept., lender, borrower, other? Third Party Reports 39 Greer Advisors, LLC 39
Questions / Answers Greer Advisors, LLC www.greeradvisors.com 40
Allen Greer Everett Allen Greer, MAI, FRICS has been in the appraisal industry since 1982, including nearly 18 years in various management roles at Bank of America, managing roughly 100 employees. He has personally reviewed or been responsible for the review of more than 50,000 commercial appraisals. He spent 8 years as the Director Research for Real Estate Risk Assessment at Bank of America working on developing risk rating models, loan pricing models, and hosting numerous data solutions for employees throughout the bank. He is the Managing Member of Greer Advisors, LLC, and specializes in commercial appraisal review, appraisal management & appraisal policies, and portfolio analytics (valuation, monitoring and optimization). He was the Appraisal Institute s Government Relations Chair for years, and runs/owns www.appraisalregulations.com. He is considered an expert in appraisal and regulations. He holds a Bachelor of Science in Business Administration Degree and a Master of Real Estate Development Degree from the University of Southern California. He remains on the Alumni Board with USC. He has been on boards of several nonprofits, including Little League, United Way and Habitat for Humanity. 41
David Rosenthal David Rosenthal, MAI, FRICS has over 30 years of experience providing commercial real estate appraisals, appraisal reviews and appraisal consulting for financial institutions, attorneys, corporations and public agencies throughout California. He is a founding principal of Curtis-Rosenthal, Inc., a commercial real estate appraisal firm with over 150 years of collective appraisal experience among its team of professionals. Mr. Rosenthal has testified as an expert witness in the Federal, Municipal and Civil Court Systems. Prior to founding Curtis-Rosenthal, Inc., Mr. Rosenthal was a corporate lending officer at Security Pacific National Bank. He has an MBA in finance and accounting from the J.L. Kellogg Graduate School of Management at Northwestern University, and a BS in business/finance from the University of Florida. Mr. Rosenthal has lectured on real estate valuation at UCLA and Loyola Marymount University and he is a frequent panelist and public speaker. He is a regular author of articles for commercial real estate publications and his Economic Update Report is a feature on RENTV.com. 42
James Watson James grew up in Walnut Creek, CA before attending UCLA and obtaining his B.A. degree in Political Science. After graduating, James spent nearly a decade working in the copier/digital imaging industry where he held positions in sales, major accounts, and Regional Sales Management for Canon in Los Angeles. James went out on his own for two years helping companies start up sales divisions prior to joining CoStar. He has been with CoStar for 17 years; he has held multiple sales and leadership roles, including Financial Services Sales Specialist, Regional Director of field sales for Los Angeles, and Managing Director of Specialists for the Western U.S. Financial Services Division focused on business development for PPR (forecasting/advisory) and CoStar Market Analytics solutions for investment managers and lenders. James currently manages a regional sales team and sales managers in Southern CA focused on providing CoStar information/analytics/forecasting and LoopNet/Apartments.com advertising solutions to all CRE disciplines. 43
Steve Basham Steve Basham is a Senior Market Analyst for the CoStar Group, specializing in the Los Angeles market. He has authored more than 50 reports on Los Angeles commercial real estate, with an emphasis on targeted, granular analysis of submarkets and micromarkets. Mr. Basham also partners with CoStar's Portfolio Strategy group to develop CRE forecasts at the national, metro, and submarket level. His work has been featured in regional and national media outlets including the L.A. Times, NPR s Marketplace, and The Real Deal. 44
Review Issues for Commercial Real Estate Appraisals Everett (Allen) Greer, MAI, FRICS, AI-GRS Greer Advisors, LLC March 31, 2017 Federal Reserve Board Greer Advisors, LLC
Goals of Presentation Regulations Qualifications Scope of Work / Written Document Examples of Issues Note: PPT Deck will be posted to www.greeradvisors.com Market information is updated via Newsletter, sign up on web site. 2 Greer Advisors, LLC
Regulations Commercial Appraisal Reviewers must be Certified in at least one State. Discuss Opinions on this issue. The Appraisal Subcommittee concluded that for federally related transactions the review appraiser need not register for temporary practice or otherwise be subjected to the regulatory jurisdiction of the State agency in which the appraisal was performed, so long as the review appraiser does not perform the technical review in the State within which the property is located. See Appraisal Subcommittee Policy Statements, Page 13 via link below. http://greeradvisors.com/asc_policy_statements_2008.pdf Some states attempt to require certification in their state. If the value is changed in the review, or the reviewer steps foot in the State, they MUST be certified in that State. 3 Greer Advisors, LLC
Qualifications As noted before, the reviewer must be certified in at least one State. If the reviewer changes the value, they have effectively re-appraised the property and the reviewer MUST be certified in the State where the property is located. If the reviewer performs a review while located in the State where the property is located, the reviewer must be certified in that State. The reviewer must be competent to perform the review. Competency is impacted by: Complexity of the Valuation Assignment Complexity of the Property / Property Type / Location Complexity of the Scope of Review Many other issues next slide. 4 Greer Advisors, LLC
Scope of Work / Written Document The following are examples of the scope of the review: Is the entire report read, or merely portions? Is the math checked, or not? If a DCF is used, is the DCF checked for accuracy? If the DCF is via Argus, does the reviewer have Argus, and is the reviewer competent with Argus? Is the sales history/listing status of the subject verified? Are comparables verified? Are the adjustments checked? Does the reviewer pull new data, i.e. comparables not in the report? Does the reviewer have access to appropriate data sources, e.g. CoStar, Argus, LoopNet, RealQuest Pro, ESRI? Does the reviewer understand environmental or other issues? Not all review documents are equal. Some reviews are so thin, you can t tell the reviewer read the report, i.e. Trust Me. Some are very comprehensive. 5 Greer Advisors, LLC
Examples of Recent Issues in past 60 days Two nearly Identical Properties, Nearly Identical Locations Two appraisals from Competing National Firms. Different Values. 22% apart on the Going Concern. 44% apart on the allocation to Real Estate. Values should have been equal. Appraiser versus Assistant Completing the work. Recent Large change in value, $1,380,000 down on $500,000. First Report Missed the recent Listing of the Subject. Scope was NOT sufficient. Appraisal Quality is NOT an Absolute, Differs Regionally by Bank, by Dept. in Bank. Who is driving or influencing the appraiser. Is it the appraisal dept., mortgage broker, lender, borrower, who? It was the borrower/developer in the first example. Is the appraiser competent to understand Environmental / Engineering Reports? 6 Greer Advisors, LLC
Questions / Answers Greer Advisors, LLC www.greeradvisors.com